"When
the emerging economies are going to bring new GDP figures for their
economies like India being projected to bring 10% GDP growth, demand
of crude is bound to increase along with the price increase. India
is grappling with the problem of poor and low crops cultivation.
That’s one of the biggest reasons for higher food inflation. Despite
a good monsoon in 2010-2011 India enjoyed the flavour of 18% food
inflation."

Indraneel Sen Gupta

INFLATION BURNINGS

The
RBI came up with another round of old fashioned rate hike to control
inflation. We have already witnessed 7 rate hikes within 2010-2011
to control the food inflation. Every time we find RBI using words
related to control the devil of inflation by compensating growth,
but this time their was a twist in the tale. This is the first time
RBI is more concerned about the slowing growth of emerging economies
including the Home country.

The emerging economies are facing the heat of paying more import
bill due to rising oil prices. Everything cannot be blamed on
tension among Middle East about rising crude prices. When the
emerging economies are going to bring new GDP figures for their
economies like India being projected to bring 10% GDP growth, demand
of crude is bound to increase along with the price increase. India
is grappling with the problem of poor and low crops cultivation.
That’s one of the biggest reasons for higher food inflation. Despite
a good monsoon in 2010-2011 India enjoyed the flavour of 18% food
inflation. Keeping this in mind this year the Union Budget proposed
to set up and spend funds on building food storage infrastructure
and also, in order to promote agriculture activities, refined the
loan rate structures.

Non
food items have dropped under the production ladder reflected through
index of industrial production (IIP).
India's factory output rose by 3.7% in January - the biggest blow of
the game to capital goods segment. Capital goods output contracted 18.6
% in January in a sign that higher cost of credit and rising input cost
pressures may have forced companies to defer planned investments.

REELING EXPORTERS

If we look towards the exporters we find that they are also reeling
under the pressure of higher cost of exports.
Micro, Small and Medium Enterprises (MSMEs) which contribute to 45% of
the countries export are the one who are worst hit. FIEO Chief however
expressed his concern that the IIP has shrunk from 16.8% a year ago to
12.10% a quarter ago and is only 3.7% currently. The high cost of
credit has dampened plans of expansion and capital expenditure and would
hit ‘Profit After Tax’ (PAT) of most companies in Q4.

If we club all the punches we find that export, industrial growth and
purchasing parity all went into a tailspin in order to control food
inflation. The prices of protein sources such as milk and ‘eggs, meat
and fish’ continued to remain high reflecting structural demand-supply
imbalances and poor infrastructure facilities of storage.

WRONG TREATMENTS

It seems that the problem was somewhere else and we were doing the
treatment at some other places. After making a wrong treatment RBI is
now under the threat of slowing growth due to the rising cost of loans.
India is still about to witness in the coming two quarters the slow down
in corporate earnings. Their will be significant drop in margins of
profitability and rising cost of operation followed with higher interest
cost, eating up much of the dividend of the financial year 2011-12.

In the third quarter RBI has projected the WPI to be around 7%. Indian
government is going to face some tough situations due to the increasing
fiscal deficit due to the rising import bill of crude. The planned
expenditure of Indian government will take a hit from the rising crude
bill. Moreover companies are eagerly passing out the higher cost of
loans to the consumer and hence monthly expenditure are now double and
savings of Indian citizens are now running half of what it was in 2009.
The financial yardsticks of India like direct and indirect tax
collections, merchandise exports and bank credit suggest that the growth
momentum persists giving some great signs of ‘Not Too Much Bad’ but the
damage is happening to some other corner of the same room.

STEROIDS OF LIQUIDITY

As interest rates have been hiked to suck out the excess liquidity from
the market to control food inflation, but at the same time the Indian
market was injected with a Steroid of liquidity. Net liquidity injection
through LAF declined from an average of around 93,000 Crore in January
to 79,000 Crore in February 2011 and further to 68,000 Crore in March
(till March 16) mainly due to increase in government spending and
consequent decline in government cash balances with the Reserve Bank.

In between these times of low interest rate to high rate, companies who
took off the projects for expansion are the worst hit and struggling to
scout for easy liquidity. This very particular factor is one of the
prime factors why china is providing easy funding (funds at low interest
rate) to the Indian corporate. This same factor can spook off another
round of unauthorized improper quality of loan disbursement. Since banks
will be busy to win the race of higher loan disbursement, quality of
loans and quality of expenditure are going to be the prime agenda of
Indian financial streets.

SOME GOOD NEWS

One good news among all these hiccups is that the area sown under the Rabi crop
is higher than the last year which augurs well for agricultural
productions. This will provide healthy foods for the financial year
2011-2012.

At last I would like to accentuate the thoughtful minds of my readers.
RBI rate hike, higher cost of interest rates and consumers paying more
for their purchase are some areas where one finds the realities of
financial inclusion of India. When Budget comes we raise voices of
financial inclusion. But with rising inflation financial inclusion
disappears. Without being an inclusive one, financial and economic
stability cannot be sustainable. India needs to identify the areas where
we can control and cut off the interest rates. Financial inclusion is
about credible access to appropriate financial products and services
needed by vulnerable groups such as weaker sections and low income
groups at an affordable cost. If Indian financial regulators concentrate
on this, India can avoid fiscal imbalance and will be able to control
food inflation by focusing on higher production of crops. Urbanization
should be seized and should not be allowed further to expand where it
destroys agriculture land to a Multi Complex.

THE EFFECTS

Emerging economies are rattled with inflation and Indian economy is not
only inflated but also facing the wrath of high petrol and diesel prices
which have a greater link with the wallet of the end consumer. India
must look for alternate energy resources so that inflation can be
controlled. We are focusing on infrastructure to a much greater extent
but we are not aware that this infrastructure will be of no use if
inflation keeps on climbing and making the infrastructure projects more
costly with less profit and less dividend for the share holders.

Indian industries need to focus on the composition of funding. A prudent
mixture of equity and debt needs to be arranged so that cost of high
interest does not affect in the course of delayed execution of projects.
This is one of the most important aspects we need to keep in mind when
planning or executing cash flow structures of a project. We should not
forget that all projects in India are completed with a delay tag where
cost of the project goes up substantially by a around 30%-40% of the
initial cost of the projects. We need to keep an eye on this.